March 29, 2024

Memo From Berlin: In Germany, Weighing Debt Relief Against Debt Reduction

While Germany has tried to hold the line at providing loan guarantees, most economists say the Continent’s lingering troubles will never be resolved without a reduction in the overall debt load, particularly in Greece, a costly and unpopular step. Led by Chancellor Angela Merkel, Germany has instead preached austerity, even as public-spending cuts have deepened recessions in the periphery, actually increasing the debt load as a percentage of gross domestic product.

Early on Tuesday, finance ministers from the euro zone and the International Monetary Fund, meeting for the third time in three weeks, cobbled together yet another stopgap solution for Greece. Their debt relief measures — lowering interest rates on some debt, lengthening deadlines for debt payments, buying back debt and handing profits on Greek bonds bought by the European Central Bank back to Athens — amounted to a kind of backdoor debt forgiveness.

While the measures seemingly ensured that Greece would receive its next portion of aid, avoiding a short-term meltdown and keeping Athens afloat for the near future, they were immediately criticized as insufficient. “They did not solve a single problem in any long-term way,” said Lüder Gerken, head of the Center for European Policy in Freiburg, Germany. “They merely agreed to buy a little time for a lot of money.”

But time may be exactly what Ms. Merkel wants — 10 months to get past national elections in the fall and into a coalition with the Social Democrats, who have supported bailouts and even the jointly issued debt known as eurobonds. That might free her hands to take more far-reaching steps to address the crisis, as her finance minister, Wolfgang Schäuble, hinted during the negotiations leading to this week’s agreement — and his opponents acknowledged, sardonically.

“The debt cut has not been avoided, it has been postponed to a time after the parliamentary elections,” said Frank-Walter Steinmeier, parliamentary leader of the left-leaning Social Democrats, speaking on ZDF German Television on Tuesday. “We are realistic and try to tell the people honestly and sincerely what’s going on. Schäuble and the present government try once more to finagle their way around the truth.”

Greece’s debt is now more than 170 percent of economic output, a figure that will only grow as the country’s economy continues to contract. Reducing the country’s debt to the sustainable levels required by the International Monetary Fund “means with certainty a debt reduction later on, because the goal can’t be reached any other way,” said Claudia Schmucker of the German Council on Foreign Relations.

“That’s also clear to the federal government, even if they continue to reject it publicly,” she added.

Mr. Schäuble did exactly that, saying at a news conference in Berlin that “it was clear to everyone, including the I.M.F.,” that debt forgiveness “is no solution for the problem.” Mr. Schäuble instead repeated the line popular with the German electorate that only Greek discipline could fix the country’s problems.

“If Greece does not implement the necessary difficult reforms and adjustment measures step by step itself, then it’s a mission impossible,” Mr. Schäuble said. But those very austerity measures have been part of the vicious circle that has driven the Greek economy into a depression.

German policy makers have had plenty of chances in the past three years to give in and tell the public that many of the billions they have guaranteed are already lost, but they have not done so.

Yet the German public, after years of debate, may be a bit savvier than politicians are giving it credit for. “There has to be a debt cut,” said Jochen Slotta, 57, a taxi driver out for a stroll here on Tuesday. “Greece can’t get back on its feet any other way, but the politicians just don’t want to say it, that’s all, because then they won’t be re-elected.”

But there are legal concerns as well as political ones. The powerful and influential German Constitutional Court might strike down a haircut for public-sector debt holdings for violating the no-bailout clause. There are also concerns that other program countries like Ireland and Portugal would demand similar concessions.

“Our endeavor was to prevent sending the wrong signal that a public-sector debt cut would represent, reducing the pressure to make adjustments not just for Greece but for all the program countries,” said Norbert Barthle, a senior member of the Ms. Merkel’s party.

Tuesday’s agreement is expected to pass the German Parliament easily because of the support of the Social Democrats and the Greens. It is in the ranks of Ms. Merkel’s own coalition of conservative Christian Democrats and pro-business Free Democrats that many of the staunchest opponents to further bailouts and debt relief stand. Opinion surveys suggest that the likeliest coalition after next year’s elections would be the so-called grand coalition with the Social Democrats, which would give Ms. Merkel a broad majority and perhaps even the mandate she would need for unpopular decisions.

As the Greek debt talks grind on, a familiar pattern has come to the fore once again: it all comes down to trade-offs between what is good for Greece and the euro and what is good for Ms. Merkel and her party in domestic German politics. Every arithmetic calculation of interest and principal over Greece’s unmanageable debt burden is matched by yet another political recalibration of the latest surveys over attitudes among German voters.

“I don’t think that Merkel right now is prepared to go ahead and tell the Germans, ‘Folks, this costs us some billions and say goodbye to them,’ ” said Thomas Risse, professor of international politics at the Free University in Berlin. “The issue is really when to tell the Germans how much money we actually lost.”

Chris Cottrell contributed reporting from Berlin, and Rachel Donadio from Rome.

Article source: http://www.nytimes.com/2012/11/28/world/europe/in-germany-weighing-debt-relief-against-debt-reduction.html?partner=rss&emc=rss

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